The biggest tech IPO of 2018 was overdone

Admit it… I’m one of those people who sing really loud (and off-key) when I put on my headphones. Especially if Journey’s “Don’t Stop Believin” comes out.

I can’t help it, the music moves me…to the displeasure of anyone within listening range.

In fact, most of my iPhone’s memory is for my playlists. Before upgrading my volume recently, I actually had to delete the photos in order to keep all that music ready to go off with the touch of my finger.

Now, I have plenty of room…but there is a problem.

I’ve been known to spend upwards of $20 a month buying songs from Apple. I know this is completely unnecessary with today’s streaming technology. But I was stuck in my ways.

Recently, I “dismantled myself”… and joined the Swedish-born live listening service, Spotify. I will never go back.

So when Spotify – which is worth about $20 billion – announced its IPO in March/April in a unique way, it improved. I’ve started combing through the headlines, and analysts have already called this the biggest technical initial public offering (IPO) of 2018. The expectation is huge!

But, unfortunately, I am cynical in my heart. Despite my enthusiasm, I had to ask myself… is the publicity for Spotify stock really worth it? So let’s take a detailed look at this IPO today to find out.

Talk about a musical revolution

In my opinion, Spotify has been part of the most significant solo innovation in music since Kurt Cobain discovered perhaps ear-breaking reactions and raw, turbulent lyrics about teenage anxiety.

The concept is simple: you can stream music online. Free. Or, at most, a small monthly fee of $9.99. You just need the Spotify app to access them all.

When Spotify launched in October 2008, this was a disruptive and revolutionary idea. That’s why the company helped lead in the music streaming market, paving the way for services like Apple Music (Apple’s streaming service, which was launched later in 2015).

Spotify is an endless and easy to use treasure chest.

You listen to what you want, wherever you want, whenever you want. The app is compatible with practically every device I can think of, from computers to smartphones to tablets.

And if all that music sounds overwhelming, don’t worry – you can also use our unique music discovery feature to find songs that suit your musical tastes.

The whole platform is a great idea.

Unfortunately, investors like us have not been able to participate in this revolutionary service because the company has been privately owned for the past decade. Now that we can part with the stock soon, we need to make sure it’s worth the investment.

The Times, It’s Changing the $1.8 Trillion Industry

The first thing to note is that according to PwC, the global entertainment industry is expected to grow from $1.8 trillion in 2016 to $2.2 trillion by 2021. That’s fine, but it’s a 4.2% compound annual growth rate – down from 4.4 percent expected in 2016.

This means that the old-school entertainment industry is beginning to stabilize. To fix this, the industry needs to focus on building sustainable relationships with customers.

After all, consumers are king. When it comes to recordings – movies, TV, music – we have to dictate what we want to see, hear and experience. We vote with our time, attention, and a small subscription fee (think Netflix, Amazon Video, Hulu).

Just as industries and products like healthcare, automobiles, refrigerators, thermostats, etc. needed a revolution – see precision medicine and the Internet of Things – so did entertainment.

And this revolution is here. Spotify is just one of the top players.

That’s why Spotify has about 140 million active listeners, 70 million of whom pay extra for advanced features. Even better, the service boasts 30 million songs and adds more than 20,000 songs per day.

It also has more than 2 billion playlists, created by the company’s growing user base (a great idea that engages the customer more directly), and an additional 5 million playlists are created or edited daily.

This is clearly a massive reach. However, there is one problem…

Problem: money, money, money

Despite all this, Spotify hasn’t found a way to make a profit.

Yes, sales jumped 52% to $3.09 billion in 2016. But the net loss more than doubled, reaching $568 million. (Although the adjusted net loss is like $310 million.)

For example, approximately $2.62 billion of that revenue evaporates with cost of goods sold. Another $440 million disappeared in sales and marketing expenses, etc.

At least EBITDA came in at negative $169.2 million in 2016, compared to a $180 million loss the year before, painting calculated.

But we need to see the company generate positive income.

Spotify is not. So the numbers surprised me. With that in mind, I turned to Paul Mampilly for his thoughts on the public Spotify listing.

Paul Mambele speaking Spotify stock

Paul is the go-to guy for all things disruptive tech, so I knew he must have some interesting ideas about it. This is what he told me:

Spotify’s public listing is interesting from two angles: First, it’s an unorthodox IPO because it cut Wall Street from setting prices. Instead of making the shares available to the general public, Spotify will list itself directly on the exchange. This means that only institutional investors have access – eliminating the need for banks to set an initial price, link sellers and buyers, etc. This is something that makes initial trading essential because Wall Street’s involvement provides price stability for IPOs.

Second, Spotify is still losing money, despite having a huge subscriber base. However, it’s also a subscription business, which means repeat revenue – and that’s a great model. Plus, like Netflix, it’s a global company, so it can continue to grow.

So, the biggest concern for Spotify is this: Will enough people buy the IPO for you to want to be in it from day one? Because most of the time you get the chance to buy it at a lower price. That’s because most people play IPOs for a quick show on the first day or first week, and then ditch it.

I say that people who want to buy shares as an investment should devote their time, wait and see how the shares trade – and watch how Spotify’s business does over a few quarters. Then you can build your site up over time, if things look right.

All in all, Spotify is a great product with a great model. This may eventually lead to profitability in the future. But this is “wait and see”. Don’t get caught up in all the fuss just yet!